Understanding Candlestick Patterns (Part III)
August 13th, 2009
Hanging Man & the Hammer: It is considered a hanging man if it appears at the top of the uptrend! You are looking at a hammer if you see this pattern at the bottom of a downtrend. The hammer or the hanging man is identified by the small candle that appears at the very top of the pattern and there is usually a pretty long wick at the bottom.
If you think you have a hanging man appearing in an uptrend, you wouldnt trade on it unless it is confirmed the next day with an opening price lower than the previous close. Similarly, if a hammer appears in a downtrend, you wouldnt trade on it if the opening price on the next trading day is higher than the hammers close.
Double stick patterns depend on two days. The first day is called the set up day. The second day is called the signal day. If you put in the time and effort to monitor them, these patterns can be very powerful and profitable. Compared to single stick patterns, double stick patterns are difficult to come by and rarely appear.
Bullish Engulfing Pattern: The first double stick pattern is the bullish engulfing pattern. The name comes from the fact that the signal day engulfs the pattern day. Both the wick and the body of the second day completely cover the same ground as the first day. The setup day candle should be bearish and the signal day candle should be bullish bigger than the last day bearish candle.
Bullish Harami: A Harami is a two day pattern with the candle of the setup day than the candle of the signal day. The first day is very bearish and occurring in a downtrend. However, on the second day bulls take over. This signals reversals of a downtrend that culminated in a downtrend.
Harami Cross: It involves a Doji pattern. It should always be considered an indicator of the potential reversal. Harami Cross is a special variety of the Harami candlestick pattern. A Harami Cross can also be bullish or bearish. Bullish Harami Cross appears during a downtrend. Its setup day is a black long candle. Its signal day is a Doji. Similarly, a bearish Harami is considered to indicate reversal of an uptrend.
Bullish Inverted Hammer: This pattern occurs in a downtrend. The first day is a bearish candle. The signal day is an inverted hammer. The bullish inverted hammer is a fairly rare pattern.
Doji Star: A Doji Star can be bullish or bearish. The bullish doji star is very similar to a bullish inverted hammer. It occurs in a downtrend and signals that the bulls have had enough. A bullish doji pattern is a two day pattern with the doji appearing on the signal day during a downtrend. Likewise, a bearish doji star indicates end of an uptrend.
Bullish Meeting Line: This pattern is another signal that a trend reversal is about to take place. The setup day is a long black candle and the signal day is a long white candle.
Piercing Line: A piercing line two day candlestick pattern can be bullish or bearish! The bullish piercing line consists of a long black candle on the setup day. It is followed by a long white candle on the signal day. The open of the signal day should be lower than the low of the setup day. Likewise, in case of a bearish piercing line, a white candle is followed by a black candle and this pattern must appear in an uptrend.